WASHINGTON (Bloomberg) ? Smaller insurers in Mississippi may go bankrupt and others may flee the state if Attorney General Jim Hood wins a lawsuit over Hurricane Katrina claims, the state?s insurance commissioner said.

Hood?s suit, filed on Thursday in state court in Jackson, Mississippi, says Allstate Corp., State Farm Mutual Automobile Insurance Co. and three other insurers should pay homeowners for flood damages because Katrina?s winds caused the flooding. Most policies sold in Mississippi have excluded flood damage since 1969, Commissioner George Dale said on Friday.

Insurers that do business only in Mississippi could become insolvent if a victory for Hood set a precedent throughout the state, Dale said. Bigger insurers may simply leave Mississippi, making it impossible for roofers, plumbers and others involved in the state?s rebuilding effort to buy insurance, he said.

?I don?t see how you can change a contract, and that is basically what his lawsuit tries to do,? Dale said in an interview. ?If we make insurance companies pay claims for which they did not collect premiums, it could lead to the bankruptcy of several insurance companies.?

Hood spokesman Jacob Ray said paying flood claims from Katrina wouldn?t be a ?killer? for insurance companies. ?Insurance companies all claimed they were going to leave Mississippi after previous hurricanes, but obviously they are all still here,? he said.

Katrina flattened the US Gulf Coast, stripping bare coastal communities in Mississippi and breaking levees to flood 80 percent of New Orleans. Storm Modeler Risk Management Solutions Inc. estimated insured losses may be $40 billion to $60 billion, making Katrina the most costly disaster ever.

?I do have a concern about the market when this is over,? said Dale, who approves rate requests from insurers and grants and revokes insurance licences. He told Hood, however, that he would not ?second guess him?.

Spokesman Dick Luedke of Bloomington, Illinois-based State Farm, the largest US auto and home insurer, said the suit threatens Mississippi?s economy and the ?financial stability? of insurers. Allstate, the second largest US insurer, will prevail in the suit, spokesman Michael Trevino said. Still, ?the lawsuit does cast some significant doubt about the future viability of the insurance marketplace?, he said.

The suit also names Nationwide Mutual Insurance Co., based in Columbus, Ohio, San Antonio-based United Services Automobile Association, and Mississippi Farm Bureau Insurance.

Nationwide spokesman Joe Case said nullifying the exclusions would have a ?significant impact on policyholders across the country.?

Damage from wind is typically covered by insurers and Katrina?s winds caused a devastating storm surge that should also be covered, Hood said in his suit. Clauses that leave out coverage for flooding losses are ?unreasonably favourable? to insurers and ?oppressive? to policyholders, he said.

Richard Scruggs, who helped reach a $206 billion settlement between states and tobacco companies to reimburse smoking-related medical costs, said on Friday he would file thousands of lawsuits on behalf of clients next week to compel insurers to cover storm damage.

?This is an outrage with all of their billions in diversified risk around the world that they are going to dine and dodge,? Scruggs said in a conference call this afternoon. His Pascagoula, Mississippi home was damaged by Katrina.

The federal government is bound by law to let states settle disputes over homeowners? insurance claims, said Al Hubbard, director of President George W. Bush?s National Economic Council, at a press briefing in Washington today.

Most homeowners? policies sold by insurers don?t cover flooding, although some commercial policies do. Congress in 1968 created the National Flood Insurance Programme to offer coverage in designated floodplains in response to rising taxpayer costs to support flood victims.

There are about 27,000 homeowners with specific flood insurance in Mississippi?s three hardest hit counties, said Ed Pasterick, senior adviser with the litigation division of the Federal Emergency Management Agency, which supervises the national flood insurance programme.